How To Abate Penalties?
Before we start working on your penalties abatement, please, check out this IRS Handbook that shows how you can get in trouble with the IRS: https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf
1-1.01 Statutory Language
I.R.C. ? 7201 – ATTEMPT TO EVADE OR DEFEAT TAX
Any person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon conviction thereof, shall be fined*
not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not
more than 5 years, or both, together with the costs of prosecution.
As to offenses committed after December 31, 1984, the Criminal Fine Enforcement Act
of 1984 (P.L. 92-596) enacted as 18 U.S.C. ? 3571, increased the maximum permissible fines for felony offenses set forth in section 7201. The maximum permissible fine is
$250,000 for individuals and $500,000 for corporations.
Have you noticed this amount of $250,000 to $500,000 and imprisonment of 5 years?
I know, most people, think, well audit is only 1% of all tax returns submitted. Some are convinced that taxes are voluntary. Some think that”massaging” the number is not illegal. The bottom line is, you don’t want to wake up at night in cold sweat and shaky hands, thinking, “Is this the IRS knocking on my door now?”
Step 1. Be Compliant.
This means you simply have to comply with requests, investigations, etc and shift the burden of proof to the IRS. It is easier to be compliant if you have records and laws beneficial to your position. In any case, your strategy is to comply and have the IRS working to prove their case.
Step 2. So, how can you abate the IRS penalties?
Penalties can be abated if the taxpayer has one or more of these reasonable causes:
Inability to obtain needed records
Reliance on the advice of a professional. (CPA, EA, Attorney)
When the penalty is due to an IRS assessment error.
Ignorance of the law
Undue economic hardship
You need to know that taxpayers have the right to challenge assessment of a penalty, and may do so at any stage in the penalty process. (see Step 3.)
Reasonable cause is also applicable when the penalty is incurred due to erroneous written/audio advice given by an IRS employee.
Taxpayers may take advantage of the First-Time Abate policy. The FTA penalty relief is available only for failure to file, failure to pay, and failure to deposit penalties. The taxpayer has to be fully compliant with prior year returns, tax payments, interest payments, and deposits. An open installment agreement is still considered being compliant.
Methods of Appealing Penalties, IRM 220.127.116.11
Step 3. Audit Reconsideration.
Accounting for business is complex.
If you are positive that the IRS made a mistake and you want to prove it, you can file an Audit Reconsideration Request. You might be eligible for Audit Reconsideration if you have already filed your return and found new documents-proof.
In order to get the IRS attention to your request of Audit Reconsideration, you need to compose a creative letter that shows both:
the proof of what needs to be reconsidered and how drastically it affects your life if the IRS doesn’t follow through.
Also, include Disputed Issue Verification Form 12661, copy of submitted tax return and copy of the audit report (if you have it).
It is recommended that you fight for your case, even if the amount owed is not that significant. Every dollar counts!
If you?ve exhausted all of your avenues, you can always address your issue to the Taxpayer Advocate. That’s why they are there for!
Step 4. Additionally, you can always appeal the audit.
Appealing the audit you are under can lead to the IRS compromising on how much you owe. Although, it is suggested that you appeal your audit if you are positive that nothing else will be found there that can lead to more taxes being owed. Have your papers checked by a professional before you go to appeals?
In contrast, if you decide to sue the IRS, then new issues cannot be introduced in this venue.
Also, you may want to pay the tax owed first, then go to appeals or Tax Court. That way, if you lose your case, you don’t owe even more interest and penalties.
If you don’t sign and return your copy of the detailed examination report from the IRS outlining all proposed assessments and changes, it will generate a 30-Day Letter that explains how to appeal the audit. You must file your official protest within 30 days of the date listed on the letter.
It is important that you prepare for the appeal. You are legally entitled to copy of auditor’s files under the Federal Freedom of Information Act (FOIA), which you need to request with a specific letter.
I’d recommend creating an outline of your presentation. The outline should include IRC sections/laws favorable to your case, Supreme Court cases favorable to your case, IRS Manual, and supporting documentation.
It is also important to note here that you must be as polite as possible (no matter how much you want to tell them what you really think of them). Additionally, if the officer suspects any fraud- this is where the real problems start.
You may want to start the negotiation by asking the appeals officer to waive any penalties that the auditor assessed to you. You may want to show your good faith by compromising to pay a portion or some of the problems in your tax return.
At the end of this negotiation, the tax assessment will be transcribed to IRS Form 870, “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.” Signing this mailed to you form will pretty much conclude the case. Otherwise, you can take the IRS to the US. Tax Court.
Step 5. Bankruptcy.
In some cases, bankruptcy can be your most favorable solution. you still have to show that you are in compliance by filing all tax returns. Bankruptcy will give you “Automatic Stay”, which will prevent creditors (and the IRS) from harassing you. There are specific guidelines that you need to meet in order to qualify for bankruptcy though. (EA doesn’t handle bankruptcy cases).